Friday, December 30, 2011
America's heavy reliance on foreign oil puts it in a precarious position as a super-power. In 1970, the US was still the world’s oil largest producer, but its crude production then peaked at a level never since exceeded.
Some may be surprised to discover that the US is currently the world's third-biggest oil producer, after Russia and Saudi Arabia. But America's seemingly unquenchable appetite for oil also makes it the world's largest oil importer, by far.
Each day, the US imports roughly half the crude it uses.
Unfortunately, the US is only able to supply 48.6% of the oil it consumes, while importing 51.4% (or 9.67 million barrels per day), from oil-exporting nations.
With current consumption at roughly 19 million barrels per day (down from a whopping 21 million barrels per day prior to the recession), the US uses more oil than any other nation and equals the consumption of the next four largest national consumers combined (China, Japan, India and Russia).
However, demand for oil is increasing globally — particularly in developing nations — creating a growing competition for this finite commodity. In fact, global usage is outstripping new discoveries. For every four barrels of oil consumed, only one is discovered.
The International Energy Agency (IEA) notes that the decline rate for oil production appears to have increased to about 7% annually. That's a stunning revelation. To make matters worse, the IEA says that global demand should increase by 1.4%, or 1.2 million barrels per day, every year through 2015.
What is evident is that supply and demand are moving in the opposite directions, or, more accurately, the wrong directions. And what this tells us is that prices are going to rise.
“As excess supplies … shrink, oil prices should rise,” says Michael Bodino, head of energy research at Global Hunter Securities.
That seems self-evident.
In 2010, Bodino projected a 1% growth in global supply and 2% growth in demand. Based upon those projections, Bodino predicted $90-$100 oil in 2012. However, he was off by a year. In 2011, the price of oil once again shot above $100 per barrel.
Perhaps Mr. Bodino hadn't seen the stunning IEA data about the decline rate for oil production. Yet, other analysts appear to be well-aware of the data.
According to Kevin Kerr, editor of Kerr Commodities Watch, oil prices will climb significantly higher. By next year, Kerr thinks crude’s record high price of around $147 “may seem cheap.”
“The long-term prognosis for oil prices is much higher simply due to growing global demand,” says Kerr. “While the economic turndown has slowed usage, the growth in places like China and India are increasing demand rapidly [and] as the economies of the planet improve, so will demand for oil and gasoline.”
Absent the ability to rapidly increase supply, this will result in higher prices for all of us — perhaps much higher.
Such an increase seems highly unlikely though.
In 2009, Dr Fatih Birol, the chief economist at the respected IEA, said that most of the major oil fields in the world had passed their peak production and, consequently, the world is heading for a catastrophic energy crunch that could cripple a global economic recovery.
The first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly 7%.
This should have been front-page news the world over. But did you hear anything about it? Unless you are a keen observer of energy news, it's not likely.
In its landmark assessment of the world's major oil fields, the IEA concluded that global consumption of oil was "patently unsustainable", with expected demand far outstripping supply.
The rise in demand from China and India will create a huge supply gap that will radically alter prices, global trade and the entire global economy.
In a rather stunning development, in 2009 China surpassed the US as the world's biggest energy consumer. The tremendous growth of China's economy has been predicated on massive energy consumption, and passing the US reflects the Asian nation's rapid and enormous expansion.
With a population of 1.3 billion people, China outnumbers the US by one billion citizens. The need to provide energy for all of those people is transforming global energy markets and increasing the global demand for oil.
That, in turn, is affecting prices.
With 20 percent of the global population, China's enormous demand will continue to drives oil costs.
Given that oil is a finite resource, China's consumption and growing demand ultimately affects the US. There will be great competition for the world's remaining energy resources.
While US industrial activity has ebbed due to the recession and economic downturn, China has continued to experience annual double-digit growth rates.
In the early 1990s, China became a net oil importer for the first time as its demand finally outpaced domestic supplies. So, while China was previously a major exporter of both oil and coal, it is now heavily reliant on imports.
China is, and will long remain, one of the US's primary competitors for limited oil resources. However, in an ironic twist, America's robust appetite for Chinese exports helps the Asian giant pay for foreign oil.
China's growing energy consumption will affect the US (and the rest of the world) in manifold ways, not the least of which is economically.
Over the past century, the growth of the US economy into the global leader was predicated on energy availability and consumption. This new radical shift could put that position into play.
Whereas the US once took for granted its position as the dominant global player and energy / resource user, it can no longer do so. China is now competing with the US for vital resources, including oil. The competition will be fierce, and costly.
The US, with just five percent of the global population, currently uses 22 percent of the world's oil. But that is not a birthright. Our ability to obtain all that oil is what has made the US the world's political, economic and military leader.
Yet, the US is suddenly faced with a extraordinarily large rival that has very deep pockets, thanks to our continual purchases of cheap Chinese goods.
The US will have to increasingly rely on energy efficiency as the quest for energy resources becomes ever-more competitive.
Yet, while China plans to spend $738 billion on clean energy over the next decade, the US can't even pass an energy bill — even as Big Energy lobbyists continue to water it down.
Tuesday, December 20, 2011
• The federal government continually runs a massive budget deficit. The current deficit is equal to about 10% of the nation’s GDP, a dangerously high level.
• In Fiscal 2011, the U.S. government borrowed roughly 36 cents for every dollar spent.
• A Congressional "super committee" was assigned to make $1.2 trillion in budget cuts over 10 years. The total amount on the chopping block is equal to less than one year’s deficit. Despite this, the committee still failed to agree on cuts.
• Some 43% of federal expenditures go toward health and social security programs. This slice of the spending pie is expected to rise to 51% of total expenditures by 2016. Unless something happens that suddenly disrupts this upward spiral, these two parts of the fiscal budget will bankrupt the country.
• Meanwhile, the federal government spends a mere 3% on education. Though local governments fund most education services through property taxes, the federal government spends very little on young people compared to retired people. Why? Old people vote.
• The nation’s real unemployment rate, which includes idled workers who’ve given up looking for jobs, is 22.6%.
• According to RealtyTrac, there have been 8.9 million homes lost to foreclosure since 2007, the height of the credit crisis.
• There are approximately 48 million homes with a mortgage. This means that more than 18% of the nation’s homes have been lost to foreclosure since 2007.
• More than $10 trillion in home equity has been wiped out since the June 2006 peak.
• Nearly a quarter (22.1 percent) of all residential properties with a mortgage were in negative equity at the end of the third quarter of 2011.
• The poverty rate is more than 15%, and another 20% of the population is struggling on incomes near the poverty line.
• Some 18% of the nation’s GDP is spent on health care — twice as much as in other developed economies. Yet, all that health care spending hasn’t produced a healthier population. The United States actually fares worse than other developed countries in areas such as life expectancy, diabetes and cardiovascular disease.
• The top 1% of Americans control about one-fifth of the nation’s income and two-fifths of the wealth. The top 10% take in about half of all income and have accumulated 80% of the wealth.
• According to an AFL-CIO report, salaries for big U.S. company CEOs have jumped to 343 times the average pay for their own employees, up from 42 times in 1980.
• According to the Washington Post, since the 1970s, median pay for executives at the nation's largest companies more than quadrupled even after adjusting for inflation. Yet, during the same period, pay for non-supervisory workers has dropped more than 10 percent.
• In 2010, the average American earned $26,487 — down over $2,000 in real terms from 2006.
The U.S. government is highly dysfunctional and ineffective. Politicians don't work for ordinary citizens, but rather for the Corporatocracy that now controls the nation.
Meanwhile, the U.S. has increasingly become a land of tremendous inequality, with huge swaths of the nation having lost even the hope of the American dream.
The middle-class has been virtually lost and an entire generation of Americans do not, and will not, have the quality of life or economic freedom of their parents.
This is truly a sad state of affairs.
Monday, December 12, 2011
Millions of American workers are facing a stark reality; pension promises have been made that are not likely to be kept.
The U.S. is presently facing a pension-funding crisis. It’s estimated that only about 30-40% of pension plans are now fully funded, which means that many people will not get the retirement funds that they've been planning on and will find themselves cut short in their senior years. Most have no backup plan.
The Pew Center on the States, a nonpartisan research group, estimates that states are at least $1 trillion short of what it will take to keep their retirement promises to public workers.
However, that estimate was based on fiscal 2008 data; we are now in fiscal 2012.
Last year, two Chicago-area professors calculated the shortfall at $3 trillion. They weren't alone in their dire calculations.
A report from the National Center for Policy Analysis concurs. It also indicates that state and local pension funds are drastically underfunded to the tune of $3 trillion. That's simply stunning, and it's a horrible omen of what's to come.
The private sector has been eliminating defined-benefit pensions, sometimes in favor of 401(k) programs. But the private sector is also grappling with underfunded or collapsing pension programs.
A 2009 study found that America's 100 largest corporate pension plans were underfunded by $217 billion at the end of 2008. Given the state of the economy over the last three years, it's tough to imagine the situation has improved much, if at all.
And the Pension Benefit Guaranty Corporation says that the number of pensions at risk inside failing companies more than tripled during the recession.
As of 2008, just four states had fully funded pension programs. As a result, there are massive problems on the horizon.
The Illinois pension system, for instance, is at least 50 percent underfunded. Some analysts warn that this could push the state into insolvency if the economy doesn't pick up. The problem, according to Fitch Ratings, is that Illinois cannot grow its way out of the problem.
Illinois reports that it has $62.4 billion in unfunded pension liabilities. However, many experts place that liability tens of billions of dollars higher.
California's pension problems are simply breath-taking. The Golden State has an estimated $500 billion in unfunded pension obligations. That's a figure that could cripple the state for many years to come. Unless the state defaults, those are legal obligations that California must somehow pay. No one knows how that will happen.
In fact, under the law, all state and local pensions are non-negotiable. They are mandatory and will be funded at the expense of higher taxes or reduced services, such as healthcare, roads, or police and fire departments. By law, pension funding in some states will consume 25-30%, or more, of tax revenues.
However, if older pensions cannot be fixed, many legislators are determined to fix future pensions.
An initiative circulating for California's 2012 state ballot seeks to increase the minimum retirement age to 65 for public employees and teachers, and to 58 for sworn public safety officers.
Americans are increasingly living well into their 80s. Yet, many recipients of public pensions are retiring at ages ranging from 55 to 60. Police and firefighters often can retire starting even younger — at around age 50 — because of the physically demanding nature of some of those jobs.
Over the past two decades, eligible retirement ages have fallen for a variety of reasons, including contract agreements between states and government labor unions that lowered retirement ages in lieu of raising pay.
Three-quarters of U.S. public retirement systems in 2008 offered some kind of early-retirement option paying partial benefits, according to a 2009 Wisconsin Legislative Council study. Most commonly, the minimum age for those programs was 55, but 15 percent allowed government workers to retire even earlier, the review found. The study is widely regarded as the most comprehensive assessment of the issue.
Pension obligations may be the proverbial hump that breaks the camel's back. The states face huge battles with public employee unions and some may attempt to follow the lead of Indiana, which decertified its public employee unions.
How all of this plays out in courts across the nation will be both fascinating and impacting. Some very ugly fights will ensue. But for the states, those fights are worth engaging. There is no other choice; they can't get money from nothing.
Tuesday, December 06, 2011
A new report from Bloomberg Markets Magazine reveals that the Federal Reserve made a stunning $7.7 trillion in loans to struggling financial institutions during the 2008 financial crisis.
While the $700 billion TARP (Troubled Assets Relief Program) remains highly controversial, what immediately stands out from this report is that the secret loan program was ELEVEN times larger than TARP, or, to put it another way, TARP plus $7 TRILLION.
Let that digest for a moment.
The Federal Reserve and the Big Banks fought for two years to keep this information secret. It was only after going to court and using the leverage of the Freedom of Information Act that Bloomberg was able to get to the bottom and discover the truth.
What they uncovered is simply staggering.
During the financial crisis — which spanned form 2007 to 2009 — the Fed carried out a whopping 21,000 secret transactions in which it doled out $7.77 trillion dollars to financial institutions around the globe. That amounted to more than half the value of everything produced in the U.S. that year.
Through its so-called "discount window," the Fed loaned enormous sums of money to banks at rates as low as 0.01 percent. This essentially amounted to free money, allowing the banks to make an estimated $13 billion in previously undisclosed profits.
These loans, an extraordinary privilege not afforded to non-financial institutions, allowed the banks to avoid selling assets to pay investors and depositors who were withdrawing their money out of fear of collapse. That allowed the banks to continue earning interest on these assets, which they otherwise would have needed to sell.
JPMorgan Chase, for instance, borrowed nearly twice its cash holdings. Clearly, that was not appropriate collateral.
The six biggest U.S. banks (JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) received $160 billion in TARP funds, then subsequently — and secretly — borrowed as much $460 billion from the Fed. That accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and financial services firms.
As a result of these secret Fed loans, the Big Six banks received a $4.8 billion subsidy, according to Bloomberg, or 23 percent of their combined net income during the time they were borrowing from the Fed.
When you're in the business of lending, it's difficult not to make a hefty profit on essentially free money.
Though Chairman Ben Bernanke said in April 2009 that the Fed was making loans only to "sound institutions," it is now known that Citigroup was near collapse. Citigroup hit its peak borrowing of $99.5 billion in January 2009.
Morgan Stanley borrowed $107 billion from the Fed in September 2008, while Bank of America's peak borrowing topped out at $91.4 billion in February 2009.
However, all of this borrowing was independent of the TARP funds allocated to these very same banks. Congress was allegedly kept in the dark about the previously unreported Fed loans, which raises the question of whether TARP would have ever been approved had Congress been informed.
As a result of these essentially free loans from the Fed, the biggest banks — the ones deemed "too big to fail" — had the means to grow even bigger, buying out other struggling financial institutions, as well as paying their employees huge sums in the form of bonuses.
For instance, Bank of America acquired Countrywide Financial and Merrill Lynch; Wells Fargo bought Wachovia; and JP Morgan Chase bought Washington Mutual and Bear Stearns. Each of these banks, already arguably too big, became substantially larger.
In September of 2006, the total assets of the six biggest U.S. banks totaled $6.8 trillion. Six year later, in September of 2011, their assets had jumped to $9.5 trillion — a 39 percent increase.
This has made these institutions too big and too powerful. They are not only too big to fail, but could even be too big to save. This not only jeopardizes the entire U.S. financial system, but also the entire economy. These banks are so powerful, so connected, and so well-armed with money and lobbyists that they've made themselves virtually impervious to regulation.
The Big Six banks spent $22.1 million on lobbying in 2006. By 2010, after the crisis and the bailouts, that sum had surged to $29.4 million — a 33 percent increase. Call it government for hire, or democracy to the highest bidder.
According to OpenSecrets.org, a research group that tracks money in U.S. politics, lobbying by the American Bankers Association, a trade organization, increased at about the same rate.
The Big Six have created a monopoly that is anti-competitive and anti-capitalistic. This is bad for the economy, the country as a whole, and democracy itself.
These banks have, in effect, been incentivized to take on tremendous risks, to in fact be quite reckless. This is the essence of "moral hazard." The Big Banks operate with the implicit guarantee of government — meaning taxpayer — support, should they enter another crisis.
That's just the problem; the next crisis is a matter of when, not if. And the U.S. is wholly unprepared for this certain eventuality.
There is one final outrage in all of this. Ask yourself this; where does the Federal Reserve get an amount of money equalling more than half of the entire U.S. economy?
It creates it out of thin air, that's how. It's like a magic trick.
What other corporation can create its product out of thin air, without any investment in the resources needed to create that product? One quick look at the Dow Industrials is illustrative. The answer is none — other than the central bank.
The Fed has granted a rather extraordinary and outrageous privilege to banks and other financial institutions by allowing them to profit on free money, instantly created by computer key strokes.
All of this money creation devalues the existing money supply (meaning the money in your pocket and bank account) because there isn't a concurrent increase in the number of goods and services in the economy.
This is the essence of inflation; the money supply is inflated in relation to goods and services, devaluing the value of all money. The price of goods increase and the citizens suffer as a consequence of something they had no say in, and didn't vote for.
Those very same citizens are still suffering from the outrageous risks that banks took in the last decade, and the taxpayers are on the hook for all these trillions of dollars in bailouts.
That is outrageous. That is unjust. That should never be tolerated.